What is the PE ratio? Ask a Fundamental Analysts and he goes gaga over PE and how it is the best way to decide whether to buy or sell. Great. However when a FA comes on Television he also uses words like “but the share has been heavily oversold”. The anchor in all earnestness goes on about the fundamental. Sorry, but did the FA go into Technical analysis? So where is the line?

Difficult to say. I have been a long term fan of FA. I used TA when I bought an expensive software to do TA. One kid came to me and asked me to invest in a computer and a package called ASA. He recovered the cost within 4 months.

So is there a line? As a fundamental analysis you can do all the possible analysis of the cash flow, fund flow, ratios, seeing what is happening in China – assuming you have got a hang of all the variables, you can draw charts, make averages, etc. HOWEVER you cannot predict market moods. Market moods (which determine prices) are compared only by the market swings i.e. Price.

Can you depend on surveys? what about brokerage research (please, no smirking), talking to management, talking to competitors, etc. WHO WILL DO THIS?  Oh you will talk to analysts? did you know that analyst has a bank client who is trying to get a mandate from that client? You expect him to give a fair report? He is also in running for good analysis award..you think he will stick his head out? You honestly think they will come with the truth…well, you do not know the truth! I have got the truth from the analyst only after knowing him well. Even then I have needed to remove his bias towards the company / promoter / community to which the promoter belongs. For example I like the Murugappa group but do not like the Spic group. Bias? be my guest. I need to understand the fundamental analyst’s bias. That is the question.

With time you realize that the P in the PE is first determined by psychological factors. What is the feel good? When NaMo came to power I sold Bhel for 267 Rs. I knew it would take him time to set things right, and during that period there will be enough opportunity to buy Bhel @ 167 or thereabouts. What really changed? Sentiment. Who captures sentiment? Technical analysts.

Just based on fundamental analysis it is very difficult to buy Fmcg / Pharma – by all factors it looks overpriced. However the market loves certainty of cash flows and keeps increasing the pe. So choose your poison accordingly.

So what do you trust in the market? Just the price. It is the only number which is arrived at by the play of millions of people. Not just by some Ivory Tower analyst. Not by some Technical analyst. Not by some baboo(n). Not by some Fundamental analyst. Not by the Chairman of the company. Pure market play.

So the best thing to watch is the price. At that price the market is telling you what is the price momentum, relative strength, advancing days, declining, volumes, history of the price. Do you need all this? For predicting? No. For learning? Yes.

It is also telling you what is the PE, the dividend yield, the Cash earning, the pricing power, the growth, the margins, the….etc.

It does not tell you whether it is a buy or a sell. It is not a screaming sell or a salivating buy. You have to decide.

The data is there. Take it. Make it into information. Use it. Act on it.

Go and do your home work. Tell me whether HUL is a good buy or a good sell. With the reasons. Getting the answer right is easy. Getting the reason is almost impossible.

 

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  1. Comment by MK Srivatsan and experienced Tech analyst:

    Your article sums it up well..there are good analysts – fundamental analysts or technical analysts and there are bad analysts. The bad analysts, irrespective of the tool that they use, are not consistent, mix up approaches, are not aware of the limitations of their analytical tool, do not follow risk management practices etc etc…I respect experienced Fundamental Analysts because there is a method to their approach just as there is a systematic approach while I am doing Technical Analysis.

  2. Hi Subra sir,

    while selecting the stocks from each sector what should be the parameters with high priority. is it Debt to equity ratio, pledged %, return on equity, PB ratio or PE.

    some of the good stocks have high PB ratio….what are the sectors for which we should give weightage to the PB ratio.

    In case of HUL all is well except high PB ….so confused between buy or sell.. Please throw some light here

    Thanks,
    K C Rana

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